The international consensus is not bearish enough on China. Its strong growth rates since 2008 have been the result of massive state intervention, particularly through huge money printing and state-sponsored investment spending, possible on this scale because China is still Communist. Its money supply has doubled since 2008 and is still growing at double digits, as is fixed investment. Yes, the resulting headline growth impresses Western economists. But it has been bought at the price of spectacular misallocations of capital. China has been supersizing its bubbles. And much of the fixed investment will undoubtedly turn out to be wasteful. To assume that the government can painlessly rebalance the economy is a myth. Soon, the market will demand liquidation of these huge imbalances. When this starts, it will be the mother of all hard landings.
Detlev Schlichter is an economist and author. His website is detlevschlichter.com
On the face of it, China’s economic slowdown is unwelcome news for a government gearing up for a leadership transition in early November. In fact, policymakers in Beijing probably feel relieved. While the headline figure tracking year-on-year growth was down, output accelerated relative to the previous quarter. Admittedly, conditions on the ground are probably not as rosy as these official figures suggest. But if we look instead at direct, and hence more trustworthy, measures of activity on China’s roads and railways and in its ports, there is plenty of evidence that the economy has begun to stabilise. Meanwhile, longstanding fears of an increase in social unrest if growth slowed have not materialised. There have been few reports of firms closing. Indeed, average real incomes in urban areas are rising at a double digit rate. China’s economy might have bottomed out, but we are not expecting a significant rebound.
Mark Williams is chief Asia economist at Capital Economics.